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HUD and Cooperative Mortgage Payoff

By Jason Hall

        In today’s highly competitive lending market where interest rates seem to drop daily, many cooperatives are finding it advantageous to refinance their HUD insured mortgage(s). Some refinance so as to tap into their equity for capital improvements to the property, others simply to lower the mortgage payment to decrease operating costs. However, many refinance because paying off the existing HUD insured mortgages terminates the regulatory agreement with HUD, thereby freeing the cooperative from HUD oversight.

        Decades ago, when the cooperative housing movement was at its strongest, many cooperatives found it difficult to obtain financing for their developments. HUD became the savior for many cooperatives by insuring their mortgages. Lenders were more willing to finance cooperative projects with the assurance that if the cooperative defaulted on the mortgage payments, HUD would be responsible for paying off the loan. In exchange for insuring its mortgage payments, the cooperative would agree to pay HUD (usually as part of its monthly mortgage payment) a mortgage insurance premium, and would further agree to enter into a “regulatory agreement” with HUD.

        The regulatory agreement generally grants HUD control over the cooperative by restricting the operation of the cooperative to ensure compliance with HUD policies. The cooperative remains under “the thumb” of HUD as long as the regulatory agreement is in effect. The penalties for a cooperative’s violation of the regulatory agreement can be harsh, and include forfeiting the property to HUD. Only when the regulatory agreement is terminated can a cooperative truly operate as an unrestricted and “free” corporate entity, hence many cooperatives view refinancing as a road to freedom from HUD control.

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